For all of those who revel in blaming big government, too high taxes and too much regulation, there is an unexpected consequence to all their laissez faire, capitalist efforts: Those efforts have resulted in economic volatility that has scared the bejesus out of the rest of the world. They have also accelerated a flight from America's economic model and the country's role as the superpower. Since leadership and power in international relations is based in part on perceptions, all of this "fundamentalist capitalism" has diminished America's influence in the world.
The economic crisis of 2007 to 2008 taught legislators nothing about the consequences of "doing the least." Their naive belief in the fundamental capitalist legacy of the Reagan/Bush/Clinton/Bush era has left us with a system guaranteed to experience violent economic disruptions.
Here is how it works. If you are the world's largest and most stable economy, everyone and every country will accept your currency because its implied backing is the behemoth economic engine. That stature provides the U.S. the status of issuing the "reserve currency," the currency most other countries will accept in return for goods and services. Because the U.S. dollar is the reserve currency, the U.S. can manage its way through lots of economic potholes, as it can issue debt or print money and others will accept it without question.
If the issuing country (in this case, the U.S.) has too much deficit spending, or runs perpetual trade deficits, or has dramatic and violent reversals or downturns, it raises real questions in the minds of other countries as to why that currency should remain dominant. The U.S. evolved as the superpower over a period of decades after World War II because it had a growing economy, strong corporate regulations and a boring but reliably stable banking system. Its economic downturns were moderated by economic stimuli; its budgets were modestly either balanced or had relatively small deficits; and most importantly, it had a growing middle class.
Starting in the early 1970s, American businessmen and bankers initiated a determined push to have more control over the size of government, the regulation and oversight of America commerce. Over a period of 40 years, business interests managed to persuade legislators and regulators that the private sector and unregulated markets had a special wisdom. As Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, was inclined to say, "the rational decision[-]making" of American business would weed out excess and provide "market stabilizing private regulatory forces." This new world of liberated capitalism was dubbed the "American model" and promoted to the rest of the world.
Ironically, the capstone of the process to free entrepreneurs from unwanted regulation — thereby unleashing the American model — were the Clinton administration's Wall Street mavens, Robert Rubin and Lawrence Summers, who each served as secretary of the Treasury. They were the architects of the demise of the Glass-Steagall Act, the legislation that required traditional bankers to be separated from investment banks or securities trading. The result was unprecedented leveraging of financial risk (in so many words, using depositors' money from the banks to crap shoot in the stock market and then the housing market.). From this we were treated to the dot-com and housing/derivatives debacles of 1999 to 2001 and 2007 to 2008.
Europeans viewed this with horror, and the Chinese saw it as a threat and an opportunity. In each case, moves were made and continue being made to diversify away from a dollar-dominated international trade system. In so many words, both allies and prospective enemies are vying to find ways to limit and weaken American economic leadership. The effort is not so much to crush the U.S. as it is to protect their own franchises from the consequences of unregulated capitalism.
The very programs and policies of our business community — pushing for deregulation, reductions in taxes and divergence away from the culture that supported a healthy middle class – have led to our decline as a supepower. Rather than unleashing the "genius of American capitalism from the restrictions of unnecessary government regulation," this laissez-faire approach, promoted primarily by Republicans but also the New Democrats (the Clinton era business-oriented "moderates"), has had precisely the opposite effect. It has neither enhanced economic growth nor provided stability. It has not contributed to the country's status in leading the world; rather, it has become the source of its decline.
All of this is detailed in an excellent book, American Power After the Financial Crisis, by Jonathan Kirshner, professor of political economy at Cornell University, in which he assures us that there will be more dramatic and precipitous disruptions as economic bubbles occur, financial concentrations limit liquidity needed in times of disruptions, and concentrations of wealth prevent legislative remedies.
Undergirding these unwanted outcomes is the vexing question as to how long will it take for normal, average, concerned citizens or ideologues to realize that the Horatio Alger myth of equal opportunity for all is little more than an illusion? When will the average American voter "get it"? Those who support a party or candidates that view the financial sector as all-knowing or the myth of capitalism as an exclusive means of advancing societal goals will simply cause themselves harm, as future financial crises take their toll and the country accelerates in its decline.
Russell is managing director of Cove Hill Advisory Services.